A Look at the 5 Key Investments
The following information is a free preview of the contents included
in The Financial GourmetTM.
Table of Contents
Savings Accounts
Annuities
Life Insurance
Bonds
Stocks
Pyramid of Investment
Questions and Answers
Savings Accounts
The generic term "savings account" includes the traditional bank accounts such as, certificates
of deposit, money market accounts, and savings accounts. Investors seeking safety of principal
and liquidity typically use these types of accounts. The Federal Deposit Insurance Company
(FDIC) and the National Credit Union Administration (NCUA) for up to $100,000 per account
insure these accounts against loss due to a failure of the financial institution. There are certain
restrictions and limitations to this insurance coverage.
| Uses |
Investors typically use these investments to provide a safe and stable foundation
for their investment portfolio. Some investors also use these investments to provide a
current income. |
| Risks |
Investors using these types of investments are exposed to "interest rate" risk.
These accounts usually offer a "fixed" interest rate for the term of the investment. In a
market where interest rates are increasing, your interest rate will remain "fixed" at the
lower level. You will continue to earn the lower rate until your account reaches it's maturity
date and can be surrendered without a penalty. You can then reinvest your money at the
higher rate. |
Annuities
Annuities are investments offered by insurance companies. Technically, an annuity is an
investment designed to liquidate both principal and interest in a series of substantially equal
payments to the investor over a designated period of time. A "deferred" annuity is an annuity
in which the income is compounded back into the investment and both the interest and any
income taxes due are deferred or delayed to a future date.
Investors have the ability to choose between different types of annuities such as: Fixed
Annuities, Equity Indexed Annuities, and Variable Annuities. Each type of annuity offers different
risk/reward levels to meet the needs of almost any investor.
| Uses |
Investors looking for safety, tax-deferred growth, and/or tax-favored income
typically use Annuities. |
| Risks |
Most annuities have surrender charges associated with early withdrawals. Also,
Variable Annuities have market risk associated with fluctuation in both the stock market
and bond market. If you surrender an annuity during the surrender period or during a
down cycle in the market, you could incur a lost of earnings and/or principal. |
Life Insurance
Life insurance has evolved over the years to combine the protection of life insurance death
benefits with the growth of capital associated with cash value accumulation. Policies such as
universal life, whole life, and variable life offer a single investment, which provides both life
insurance and long-term capital accumulation.
| Uses |
People seeking death benefit protection have generally used Life insurance.
However, knowledgeable investors have come to realize the importance of the
accessibility of the cash value accumulation and the substantial tax-free distributions
available to their pre-selected beneficiaries. |
| Risks |
Fixed policies rely on the financial strength of the issuing company. Variable
policies have market risk associated with fluctuation in both the stock market and bond
market. Loans against any cash value accumulation must be used carefully to avoid
any negative income tax consequences. |
Bonds
Bonds represent a loan to a company or local, state, or federal government. You are "issued"
a bond in return for the money you invest/lend the company of government entity. In return,
you the bondholder will receive dividend payments and, at maturity the principal amount of
the bond. In many instances you may be able to sell your bond prior to the maturity date, but
you may receive more or less than the principal amount.
| Uses |
Investors typically purchase bonds for the current income they
provide. Certain types of bonds such as municipal bonds, United States treasury bonds, and
certain government agency bonds also provide income tax benefits to many investors. |
| Risks |
The value/price of the bonds will generally fluctuate on daily basis. If an investor
sells a bond prior to it's maturity date, a loss of capital can occur. If the company or
government entity "defaults" on the bond, you are considered a creditor and therefore,
you may or may not receive any further dividends or principal owed you. |
Stocks
Stocks refer to a fractional ownership interest in a corporation. Simply put, when you own
stock in a company, you own a part of that company. You will participate in the profits and
losses of that company in the form of market fluctuations in the value of your shares of stock.
Stock should be considered a long-term investment.
| Uses |
Investors typically purchase stock for the long-term growth potential it offers.
Some stocks also pay dividends that provide income to the investor along with the
potential for growth of capital. |
| Risks |
The value of the shares of stock generally fluctuates on a daily basis. If you
sell your shares when the market is "down", you can incur a substantial loss on your
shares. If a company declares bankruptcy, you can lose all of your investment. |
Pyramid of Investment *
An investment program should be built like a pyramid - with a strong, broad base. The diagram
illustrates a typical investment pyramid.
* This pyramid is intended solely to illustrate a concept; it is not a promise of investment performance. Investors may differ on the risk level to which a
particular asset is assigned. Before making any investment in mutual funds or variable annuities, you should be sure to read the appropriate prospectus
or offering documents for a complete discussion of the fees and risks involved.
Questions and Answers
| What should you consider when choosing to make an investment? |
You should consider the following points:
- The Amount of Investment as a Percentage of Your Total Net Worth
- The Risk Factors Involved
- The Potential Reward
- The Duration of the Investment
All of these factors are very important. You want to know the answers to all of these
questions before you make an investment decision. |
| Which type of investments are generally considered suitable
for the "foundation" of an investment portfolio? |
Bank deposits, Tax-Deferred Annuities, and Life Insurance are generally
considered foundations of an investment portfolio. Because of the safety associated with these
types of investments, they make a very solid foundation for your investment portfolio. The risk of
loss of principal on investments such as Stocks and Corporate Bonds makes them unsuitable for most
clients. |
| What type of investment plan can offer you safety of principal, access to large portions of your principal
during times of illness and incapacitation, and protect your family by leaving them a tax-free distribution at your death? |
Life Insurance - A properly structured life insurance policy can offer you the safety and growth of capital
you are seeking, while at the same time providing a tax-free legacy for your family. |
| Which type of Tax-Deferred Annuity can offer higher potential returns of the stock market with out the
risk normally associate with the stock market? |
Equity-Indexed Annuity - The Equity-Indexed Annuity can offer you a portion of the stock market increase
without exposing you to the stock market decrease. |
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